Curse of competition

Print edition : March 13, 2020
The telecom sector is in danger of being reduced to a private monopoly following the Supreme Court ruling on the AGR issue even as a new stage of competition is set to arrive in the form of the 5G spectrum auction.

The experience in telecom and civil aviation suggests that the effort at promoting competition through private entry in sectors that were formerly the preserve of the state may extract a heavy price.

Consider the competitive shake-out in the telecom sector that may have entered its final stage. The Supreme Court, to the surprise of many, has turned tough on companies that have delayed payments due to the Department of Telecommunications (DoT) following the court’s judgment on the dispute over the definition of Adjusted Gross Revenues (AGR), a share of which had to be paid to the DoT. Based on a restricted definition of AGR, the companies had paid the DoT less than what it claimed was its due. That set off a legal battle in the courts.

With the dispute having dragged on, the interest on unpaid dues, the penalty for non-payment, and interest on that penalty have taken the sums involved to astronomical levels for two of the three private firms—Airtel and Vodafone Idea—still in the fray for a large piece of the telecom cake. They are bound to be hit badly by the judgment. It could be argued that their plight is of their own making. But the fact of the matter is that the evolution of the industry has made it difficult for them to meet the demands from the DoT that they held were not legitimate until the court judgment.

The third private player, Reliance Jio, has been left unscathed, relatively speaking, because it began operations much later and owed DoT substantially less than the others.

Meanwhile, the public sector entities, Bharat Sanchar Nigam Limited (BSNL) and Mahanagar Telephone Nigam Limited (MTNL), look like dwarf versions of their earlier selves. While their market share and subscriber base have shrunk significantly over time, they have recently seen the exit of more than 90,000 employees through a Voluntary Retirement Scheme (VRS) aimed at reducing their manpower. Delays in wage and salary payments and uncertainty over their future encouraged workers to accept the VRS offer. Around 50 per cent of the employees in BSNL and about 25 per cent in MTNL have voted with their feet.

These changes have significant implications for the telecom sector, where, after multiple players sold their spectrum rights, closed operations or were acquired by others, there are only three private firms left in the fray. The immediate issue is whether Vodafone and Airtel can take the hit of paying up as much as Rs.54,000 crore and Rs.35,500 crore respectively to the DoT. While Airtel seems confident that it can do so before the date of the next hearing in the case (March 17) set by the Supreme Court, Vodafone’s claim that it, too, will attempt to meet the deadline has been received with considerable scepticism.

There is cause for such scepticism. Vodafone notched up losses totalling Rs.62,235 crore over the first nine months of financial year 2019-20, compared with losses of Rs.25,687 crore suffered by Airtel over the same period. Both companies have accumulated large volumes of net debt, amounting to Rs.1,03,000 crore as of December 2019 in the case of Vodafone and Rs.1,14,919 crore in the case of Airtel.

Reports have it that, having suffered a cumulative loss of more than Rs.55,175 crore, the shareholders, domestic and foreign, of Vodafone, who have thus far invested around Rs.35 lakh crore, are not keen on increasing their exposure any further. This is especially true of the two main partners, Vodafone and the Aditya Birla group. Shareholder reticence is understandable since the market value of the company has collapsed. While banks that are heavily exposed to the company would like to see its revival, they, too, fear sending good money after bad. The net result is that Vodafone may find it difficult to meet the Supreme Court’s order and remain viable. In which case it will have to shut down its India operations.

Airtel, on the other hand, sitting on a large subscriber base, would prefer to stay in the game, and it may be able to persuade the banks to give it some support. But managing its large debt will still be a problem, especially as the aggressive competition unleashed by Reliance has brought average revenues per user to extremely low levels. Competition in India has meant that the tariffs are among the lowest in the world. There was some respite as in recent times Reliance raised tariffs to begin extracting profits from its investments, allowing competitors to follow suit. Industry tariffs rose by 40 per cent as a result, albeit from the low levels they had been reduced to.

5G spectrum

The problem, however, is that all this occurs at a time when the sector is set to enter a new stage in the competitive struggle, with the government having announced its decision to auction 5G spectrum. Airtel and Vodafone have been calling for a postponement of that auction on the grounds that they are overstretched at the moment and cannot outlay the needed resources. The AGR payments will only set them back even further.

Reliance Jio, on the other hand, is all prepared to bid for 5G spectrum and, in the absence of competition, leverage its preparedness as a data services provider to build its subscriber base further and diversify its services. Having acquired that spectrum, it is likely to combine enhanced services with restrained pricing to launch a new round of competition, even exercising the option of selling equity to foreign players to mobilise resources that can underwrite the competitive thrust. If that leads to an intensification of competition, Airtel, too, may not be in a position to stay in business. And with BSNL and MTNL in long-term decline, the prospect of a monopoly in the telecom area is real. The transition from public monopoly to private monopoly in the sector is not unthinkable.

That transition has multiple adverse effects. Over the last few years, the effort to induct private players into a sector that was solely a government preserve has led to bankruptcies that have meant that besides the loss of jobs substantial assets have been rendered waste. In addition, banks are expecting to see the volume of their non-performing assets rise on account of the fact that investments in the sector have been financed in large measure with credit from banks and financial institutions. This was what State Bank of India Chairman Rajnish Kumar flagged when he said the entire economy, including the lenders, would have to pay a price when any of these enterprises failed.

Specifically, competition driven by the induction of private investment in state-controlled sectors was supposed to benefit consumers, who would gain not just from better and more innovative services but also from substantial reductions in the costs of the services they subscribe to or use. That seemed true for a while. But much has changed in recent times. Besides absent signals, call drops and slow data speeds, consumers have to now contend with rising tariffs, which will intensify if industry consolidation and the transition to a single-provider dominance persists.

Civil aviation shake-out

Interestingly, this is not a phenomenon restricted to the telecom sector. In civil aviation, too, many players from minors such as NEPC Airlines, Paramount and Air Deccan to majors such as Modiluft, Kingfisher Airlines and Jet Airways have fallen by the wayside, with employees losing their jobs and assets rendered waste.

Many of these airlines, and those currently in service, have accumulated large volumes of debt. The public sector Air India is overburdened with debt and the government is desperately in search of a suitor to privatise the airline. The competition has resulted in a surge in no-frills providers, who, too, are prone to notching up losses despite cost-reduction practices, while providers of better quality services find it difficult to charge remunerative prices and at the same time ensure a reasonable passenger load factor. All this suggests that civil aviation, too, is heading for another shake-out, in which, besides wasted social resources, banks and workers would lose and customers could soon be burdened with rising prices. Moreover, services on the so-called unprofitable routes that mitigate regional inequalities are likely to be pruned or phased out.

This suggests that the reasons why public ownership was seen as unavoidable in these capital-intensive sectors providing essential or crucial public services, across lucrative and loss-making lines and routes, at reasonable prices are still valid. Opening up these sectors to profit-pursuing private investors in the name of subjecting lethargic public monopolies to competition that would improve services and reduce costs may appear a good idea at first. But experience suggests that in time, social waste, worsening services and higher prices may be the result. Competition may prove a curse rather than a means to benefit all.

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